Bernanke: Stress Tests Could Pave Way for Further Intervention

The stress tests on the 19 biggest U.S. banks pave the way for an ongoing interventionist approach to regulation, Ben Bernanke, chairman of the Federal Reserve, signalled on Thursday.

Hours before the publication of the results of the tests, which are expected to show that banks including Citigroup and Bank of America will need to raise equity, Mr Bernanke told the Chicago Fed that the “exercise has been comprehensive, rigorous, forward-looking, and highly collaborative… Undoubtedly, we can use many aspects of the exercise to improve our supervisory processes in the future.”

With the US government in the throes of a broad regulatory overhaul, Mr Bernanke said that liquidity and risk management would be subject to “equal emphasis” with capital standards, which fell short in measuring the health of the sector. >>>

Banking assets that would typically earn a premium, such as deposits, will be difficult to sell right now, experts say. While many banks want to bolster their deposit bases through acquisitions, most are unwilling to suffer the goodwill deductions and higher tax bases that would result. Selling bank branches, whose hard assets have to be capitalised, is also likely to prove challenging.

Some experts were concerned that a broad attempt at government-supported asset sales could result in another AIG-type situation, where a sweeping effort to sell assets had largely fizzled out. Many banks have put their asset management divisions up for sale, for example, and attracted insufficient interest. “The government made that mistake already, lending money into M&A that didn’t happen,” said one adviser. “There’s no M&A. People have got enough trouble working out their own stuff.”

If the government pushes too hard for asset sales, it could turn the banking sector into a Rubik’s cube, where each attempt to rectify a situation either nullifies the efforts already made or makes matters worse, say experts. >>>